Washington – Last month, when Federal Reserve Chairman Jerome Powell spoke at an economic conference in Jackson Hole, Wyoming, he issued a stark warning: The Fed’s campaign to curb inflation by aggressively raising interest rates, he said, would “bring some pain” to Americans.
When the Federal Reserve wraps up its last meeting on Wednesday and Powell holds a press conference, Americans will likely get a better idea of how much pain could be in store for them.
The central bank is expected to raise its key short-term interest rate by three-quarters of a basis point for the third time in a row. Another increase of this magnitude would boost its benchmark rate – which affects many consumer and business loans – to a range of 3% to 3.25%, its highest level in 14 years.
However, many Fed watchers will pay special attention to Powell’s words at a press conference afterward. His remarks will be analyzed for any hint as to whether the Fed expects to moderate its rate increases in the coming months – or alternatively continue to tighten credit significantly until it is satisfied that inflation is on the way to lower.
In another sign of the Federal Reserve’s growing concern about inflation, it will also likely signal on Wednesday that it plans to raise interest rates much higher by the end of the year than expected three months ago – and keep them higher for longer. Economists expect Federal Reserve officials to predict that the key interest rate could rise to 4% before the new year. It is also likely to indicate additional highs in 2023, perhaps up to about 4.5%.
Short-term rates at this level will make a recession more likely next year by sharply increasing the costs of mortgages, auto loans and business loans. The Fed intends that these higher borrowing costs will slow growth by calming a still-strong labor market to curb wage growth and other inflationary pressures. However, the risk is growing that the Fed could weaken the economy as much as it causes a downturn that could result in massive job losses.
The economy has not seen rates as high as the Fed expects since before the 2008 financial crisis. Last week, the average fixed-rate mortgage rate exceeded 6%, its highest level in 14 years. Credit card borrowing costs are at their highest level since 1996, according to Bankrate.com.
Powell and other Fed officials still say the Fed’s goal is to achieve a “soft landing,” through which they will slow the economy enough to tame inflation but not so much as to lead to a recession.
But by last week, that target seemed out of reach after the government reported that inflation over the past year had been a painful 8.3%. Even worse, so-called core prices, which exclude volatile food and energy costs, rose much faster than expected.
The inflation report also documented how widespread inflation is in the economy, complicating the Fed’s job. Inflation now appears to be increasingly fueled by rising wages and consumers’ constant desire to spend and to a lesser extent by the lack of supplies that crippled the economy during the pandemic recession.
“They are trying to avoid a recession,” said William Dudley, the former president of the New York Federal Reserve. “The problem is that the room to do that is almost non-existent at this point.”
Rapid interest rate increases by the Federal Reserve mirror the steps other major central banks are taking, contributing to concerns about a possible global recession. Last week, the European Central Bank raised its benchmark interest rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all raised interest rates significantly in recent weeks.
And in China, the world’s second-largest economy, growth is already suffering from repeated government shutdowns of the coronavirus. If a recession engulfs most of the big economies, it could derail the US economy as well.
In his press conference on Wednesday, Powell is unlikely to ditch any hints that the central bank will ease its campaign to tighten credit. Most economists expect the Fed to stop raising interest rates in early 2023. But for now, they expect Powell to strengthen his hawkish anti-inflation stance.
“It’s going to end in a hard landing,” said Kathy Bostancik, an economist at Oxford Economics.
He wouldn’t say that, Bostancic said. But, referring to the Fed’s last meeting in July, when Powell raised hopes of an eventual pullback from rate hikes, she added: “He also wants to make sure that markets don’t come out and bounce. That’s what happened last time.”
In fact, investors then responded with stock quotes and bond purchases, driving down the prices of securities such as the 10-year Treasury standard. Higher stock prices and lower bond yields in general are boosting the economy – the opposite of what the Fed wants.
The central bank has already participated in the fastest series of interest rate increases since the early 1980s. However, some economists – and some Federal Reserve officials – argue that they have not yet raised interest rates to a level that will restrict borrowing and spending and slow growth.
Loretta Meester, president of the Federal Reserve Bank of Cleveland, and one of the 12 officials who will vote on the Fed’s decision Wednesday, said she believes it will be necessary to raise the Fed rate to “somewhat above 4% by early next year and keep it there. .
“I don’t expect the Federal Reserve to cut interest rates next year, dispelling the expectations of many Wall Street investors who had hoped for such a reversal,” Meester added. Comments like Meester’s contributed to the sharp drop in stock prices last month that began after Powell’s tough speech. Anti-inflation conference in Jackson Hole.
“Our responsibility to stabilize prices is unconditional,” Powell said at the time – a remark widely interpreted to mean that the Fed would fight inflation even if it required massive job losses and a recession.
Many economists seem convinced that stagnation and large-scale layoffs will be necessary to slow price increases. Research published earlier this month sponsored by the Brookings Institution concluded that unemployment may have to rise to 7.5% to bring inflation back to the Fed’s 2% target.
Only a severe deflation would reduce wage growth and consumer spending enough to cool inflation, according to a paper by Johns Hopkins University economist Lawrence Ball and two economists at the International Monetary Fund.
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